School of Finance, Guangdong University of Foreign Studies, Guangzhou 510420, China

Received
March 2017Revised
October 2017Published
April 2018

Fund Project:
This work was partially supported by Research Grants Council of Hong Kong under grant 519913, 15224215 and 15255416; NNSF of China (No. 11601163, No.11471276, No.11771158); NSF Guangdong Province of China (No.2016A030313448, No.2015A030313574, No.2017A030313397); The Humanities and Social Science Research Foundation of the Ministry of Education of China (No.15YJAZH051)

This study addresses an investment problem facing a venture fund manager who has a non-smooth utility function. The theoretical model characterizes an absolute performance-based compensation package. Technically, the research methodology features stochastic control and optimal stopping by formulating a free-boundary problem with a nonlinear equation, which is transferred to a new one with a linear equation. Numerical results based on simulations are presented to better illustrate this practical investment decision mechanism.

A. Berger and G. F. Udell,
The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle, Journal of Banking and Finance, 22 (1998), 613-673.
doi: 10.2139/ssrn.137991.

A. Berger and G. F. Udell,
The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle, Journal of Banking and Finance, 22 (1998), 613-673.
doi: 10.2139/ssrn.137991.